Distorted sound in Macbook

I am using a 13" White mid-2007 Macbook.

Some time ago, I noticed that the sound from the built-in speakers is not clear.

1. The sound from built-in speakers became lower in volume and a bit distorted - as if someone had messed with Equalizer settings. It gets worse as I increase the volume level. (Distorted/Crackling is the best way I can describe it - or maybe as a low quality sound).
2. Even the startup boot chime sound is not ok.
3. The sound from the headphones is perfectly ok.
4. This Macbook has Windows also installed and I checked that sound in Windows is also perfectly ok. I am assuming that it means that the problem is not hardware related one.

Any idea what could be wrong and how I can fix it?

Thanks!